Ready for retirement? If you have a Defined Benefit (DB) pension with your workplace, you could receive an annual income for life. But if you want more control over when you receive your money, you may need to transfer out of your scheme in order to access your funds. Deciding whether to transfer your pension, and how you’ll use it to fund your retirement are life changing decisions.
How does a pension transfer value work?
To find out exactly how much your Defined Benefit pension is worth, you will need to request a ‘cash equivalent transfer value’ from your pension scheme administrator. Your pension fund value will depend on these factors:
- How far away you are from retirement
- Your salary
- The length of your service with the company
- Any rules about how your pension will increase, and any other benefits from the scheme
- Assumption on future annuity/interest rates
- The current value of gilt yields.
What’s the difference between pension fund values and pension transfer values?
When transferring your Defined Benefit pension, you’re exchanging future guaranteed pension benefits for a cash lump sum, representing the current value of your benefits. You’ll need to work with a financial adviser to always assess your wider circumstances when recommending whether to transfer your DB scheme. If you’re considering a transfer, it is important to understand than an adviser may advise against a transfer if they do not believe it is in your best interests financially.
With a Defined Contribution pension it’s much easier to know how much your fund is worth – as this is based on the contributions you have made (and your employer, in the case of workplace pensions) and how they’ve grown (or shrunk!) over time.
Some pension schemes may have different benefits for being in that scheme – like additional death benefits, guaranteed rates. Others may have early exit fees – encouraging you to stay in that scheme and keep saving. It’s important to check the terms of your pension and find out whether your fund is the best place for your money.
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The value of your investment and income from it can go down as well as up and you may not get back the full amount invested.
Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits. Accessing pension benefits is not suitable for everyone. You should seek independent financial advice before embarking on any course of action.